The IRS allows several Cost Segregation methodologies…which one is best?
Here is a list of the six most common cost segregation methodologies…
- Detailed Engineering Approach from Actual Cost Records
- Detailed Engineering Cost Estimate Approach
- Survey or Letter Approach
- Residual Estimation Approach
- Sampling or Modeling Approach
- “Rule of Thumb” Approach
For this discussion, we will address the first on this list…the “Detailed Engineering Approach from Actual Cost Records” Approach. According to the IRS Audit Techniques Guide for Cost Segregation, “…the ‘Detailed Engineering Approach from Actual Cost Records’ approach uses costs from contemporaneous construction and accounting records. In general, it is the most methodical and accurate approach, relying on solid documentation and minimal estimation. Construction-based documentation, such as blueprints, specifications, contracts, job reports, change orders, payment requests, and invoices, are used to determine unit costs. The use of actual cost records contributes to the overall accuracy of cost allocations, although issues may still arise as to the classification of specific assets.” The Detailed Engineering Approach from Actual Cost Records is also known as the Detailed Cost Approach. Continue reading
